Titan Indem. Co. v. Triborough Bridge and Tunnel Authority, Inc., 81
| Decision Date | 26 January 1998 |
| Docket Number | No. 81,D,81 |
| Citation | 135 F.3d 831 |
| Parties | -1281, 98-1 USTC P 50,168 TITAN INDEMNITY COMPANY, Plaintiff-Appellant, v. The TRIBOROUGH BRIDGE AND TUNNEL AUTHORITY, INC., Quadrozzi Equipment Leasing Corp., Quadrozzi Concrete Corp. and Helen Carr Corp., Defendants, Internal Revenue Service and NYS Dept. of Labor, Defendants-Appellees, ocket 96-6299. |
| Court | U.S. Court of Appeals — Second Circuit |
Neil B. Connelly, Kroll & Tract, New York City, for plaintiff-appellant.
Jeffrey S. Oestericher, Assistant United States Attorney, Southern District of New York, New York City, for defendant-appellee Internal Revenue Service.
Patricia Smith, Assistant Attorney General for the State of New York, New York City, for defendant-appellee New York State Department of Labor.
Before: KEARSE and McLAUGHLIN, Circuit Judges, and TRAGER, District Judge. *
Titan Indemnity Company appeals from a judgment of the United States District Court for the Southern District of New York (McKenna, J.) determining competing claims to the proceeds of a public improvement contract. We reject all of Titan's arguments, and affirm the district court.
On October 26, 1990, D.H. Farney Contractors, Inc. ("Farney") entered into a contract with the Triborough Bridge and Tunnel Authority ("TBTA") to repair both the Triborough Bridge and the Verrazano Narrows Bridge ("TBTA Project"). The contract required Farney to get performance and payment bonds from a surety company. Accordingly, Titan Indemnity Company ("Titan"), a Texas corporation licensed to write surety bonds in New York, issued the customary performance bond and a labor and material payment bond on behalf of Farney. On or about November 15, 1990, Farney commenced work.
In the fall of 1991, Farney stopped working on the TBTA project; and sometime thereafter Farney was declared in default of its contract obligations. At this time, TBTA held a fund of $97,601.88 that it admittedly owed Farney for its work ("Contract Fund").
The Contract Fund lies at the vortex of this litigation. TBTA withheld $91,153.90 pursuant to liens, levies, and restraining orders, including $21,495.65 withheld pursuant to a "notice to withhold" from the New York Department of Labor (N.Y.DOL). The remaining $6,447.98 was withheld as "contract retainage," that is, money withheld from each contract payment as security for future performance.
After default, TBTA demanded that Titan complete the project. Titan and TBTA entered into a completion agreement, whereby Titan hired another company as a completion contractor to finish the job. The repairs were then completed, and on June 8, 1994, the TBTA issued its final certificate of completion.
All the while, the TBTA continued to hold the $97,601.88 Contract Fund. Five creditors made claim to this money--(1) the IRS demanded $16,721.39 for income and FICA taxes that had been withheld on behalf of Farney employees who had worked on the project; (2) the New York State Department of Labor (N.Y.DOL) had issued a notice to withhold $48,450, pursuant to § 220-b of New York Labor Law, which represented its estimate of Farney's liability, including wages, interest, and penalties for failure to pay two of its employees the prevailing wage rate under New York law; (3) Quadrozzi Concrete Corp. and Quadrozzi Equipment Leasing Corp. ("Quadrozzi") sought $3,458.30 for concrete and other materials provided to Farney for the TBTA project; (4) Helen Carr Construction Corp. asserted a claim arising from an unrelated judgment against Farney on another project; and (5) Titan, the surety, claimed the lion's share including $90,350, the amount it had to pay to complete the project, giving TBTA appropriate
credit for the amounts TBTA had already paid Titan.
In March 1994, Titan sued in the Supreme Court of the State of New York seeking a determination of the parties' rights in, and distribution of, the Contract Fund. The TBTA filed an answer and an interpleader claim admitting that it had the Contract Fund and seeking to deposit it with the court pending adjudication of the parties' claims. As a disinterested stakeholder, the TBTA made no claim to the Contract Fund.
The IRS removed the action to the United States District Court for the Southern District of New York (McKenna, J.) and all the parties moved for summary judgment. Granting some of the motions and denying others, the district court made the pivotal ruling that the Contract Fund was a trust fund under section 70 of Article 3-A of the New York Lien Law ("3-A trust fund"). As such, said the court, the order of priority for claims against the fund is set forth in Lien Law, Article 3-A, section 77. Accordingly, the court determined that the IRS' claim for taxes arising from the TBTA project received first priority.
While no one disputes that the Contract Fund is an Article 3-A trust fund, it is not as simple as all that. As the district court noted, New York has introduced into the calculus the paradoxical notion of "super-priority," which means that certain claims jump to the head of the line and are deducted from the Fund before the priority of the other liens is even evaluated. The district court determined that under New York law some of NYDOL's claims earned "super-priority" status and, consequently, were deducted from the $97,601.88 Contract Fund before the other creditors even lined up.
NYDOL's claim ultimately consisted of three parts: (1) $22,931.50 in back wages owed because Farney failed to pay an employee the prevailing wage rate under New York law; (2) $9,174.22 in interest due on those back wages; and (3) a 25% penalty assessed for Farney's failure to pay the prevailing wage rate. The district court ruled that the wages owed and actually withheld by TBTA pursuant to NYDOL's withholding notice "are properly deducted from the funds retained by the [TBTA] before they form the corpus of [the] 3-A trust." Those wage funds, the district court determined, were entitled to a "super-priority" under section 220-b of the New York Labor. Accordingly, because the money TBTA actually withheld pursuant to NYDOL's withholding notice amounted to $21,495.65, the district court granted NYDOL a "super-priority" for that sum.
The remainder of NYDOL's claim--$10,610.67 in remaining back wages and interest, and the 25% penalty--was determined not to enjoy this "super-priority." Rather, the court determined that the remaining back wages and interest constituted an Article 3-A trust claim entitled to second priority after the IRS's tax claim. NYDOL's 25% penalty claim was not considered an Article 3-A trust claim at all.
Quadrozzi's claim for payment for materials was treated as an Article 3-A trust claim and awarded third priority. All the remaining funds were awarded to Titan as surety.
The claims of Helen Carr Corp. and the penalty portion of the NYDOL's claim were granted nothing, the court concluding that those claims did not constitute trust beneficiary claims under Article 3-A of the New York Lien Law. The district court determined that NYDOL, insofar as its claim for the penalty, and Helen Carr would have to pursue their claims against Farney independently of this action.
The following, therefore was the ultimate priority and distribution fixed by the district court:
A. $21,495.65 NYDOL super-priority (money withheld pursuant to
notice)
* * * *
1. $16,721.39 IRS
2. $10,610.07 NYDOL (remainder of back wages and interest claim not
covered by money withheld)
3. $ 3,458.30 Quadrozzi
4. $45,316.47 Titan (remainder after above claims satisfied)
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Total: $97,601.88
Titan appeals, arguing that the district court erred: (1) by according priority to the trust fund beneficiaries over Titan's suretyship claim; (2) by according NYDOL's claim
priority over Titan's claim; (3) by finding that New York Lien Law, rather than the parties' agreement, established the priority of claims; and (4) by applying state rather than federal law in determining the IRS's rights.
Titan maintains that the district court erred when it determined that Titan's claim as a completing surety was inferior to Article 3-A trust claims. Titan argues that its claim to the Contract Fund is superior to 3-A trust claims, a priority it earned when it became equitably subrogated to the rights of both Farney and TBTA in the Contract Fund.
Section 70(1) of New York Lien Law states that funds "received by a contractor under or in connection with a contract for ... a public improvement in this state, ... and any right of action for any such funds due or earned or to become due or earned, shall constitute assets of a trust." N.Y. Lien Law § 70(1). It is undisputed that the proceeds of the contract at issue are trust funds under Section 70 of the New York Lien Law.
That said, the next inquiry is the order of priority. The priority of claimholders is established by section 77 of the Lien Law. First priority is given to claims for taxes and for unemployment insurance and other contributions due by reason of employment. N.Y. Lien Law § 77(8)(a).
Second priority is given to trust claims of laborers for daily or weekly wages. Id. at (8)(b).
Third priority is given to trust claims of laborers for benefits or wage supplements. Id. at (8)(c).
Fourth priority is given to certain claims to a laborer's wages made by third parties. Id. at (8)(d).
Remaining trust claims are distributed pro rata. § 77(8).
Titan misunderstands its rights under New York law. Generally in a public improvement contract, the contractor is required to find a surety that will secure the performance of his contract. Upon default by the contractor, the surety, pursuant to a performance...
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